US must raise taxes to lower deficit, say global investors

Recent results on the quarterly Bloomberg Global Poll of investors, traders and analysts indicate that global investors support the idea of the U.S. raising taxes to combat the budget deficit. Nearly two-thirds of investors polled believe that substantial deficit reduction will not be possible without additional tax revenue, a position that runs counter to the Republican stance on how to handle the federal deficit.

No easy agreement between Obama and GOP

Sixty percent of investors polled have significant doubt that President Obama and Republican lawmakers will be able to agree upon deficit-reducing measures before the start of the next fiscal year on Oct. 1. However, an even higher percentage of respondents (70 percent) are “confident” that Congress will raise the $14.29 trillion debt limit in order to avoid default that would send borrowing costs skyrocketing for everyone, eliminate millions of jobs and hurl stocks, home values and retirement savings into a financial abyss.

Obama’s reinvigorated popularity can’t change facts

Obama’s popularity ratings have risen globally since the death of Osama bin Laden, but that has done nothing to quell foreign investor fears over what could happen if something resembling the GOP’s plan to keep taxes low is put into action. While the majority of U.S. investors in the Bloomberg poll favored the GOP approach to the nation’s budget, 55 percent of them still don’t think it’s possible to cut the federal deficit “significantly” without raising taxes.

As it currently stands, the U.S. budget deficit will decrease slightly to $1.1 trillion in fiscal 2012. Fiscal 2011 will end with an approximate deficit of $1.5 trillion.

Taxation, without entitlements

Sacred cows like Social Security and Medicare-related programs, which make up more than 40 percent of the federal budget, have traditionally been off limits from spending cuts. This has prompted some to assert that higher taxes are the only way to make a deficit-busting difference. While unpopular, if a presidential administration were to be able to convince lawmakers and the electorate that tapping into such entitlements is a good idea, it could lower the national debt for future generations. Currently, Social Security, at 20 percent of the federal budget, receives $707 billion annually, according to the Center on Budget and Policy Priorities. Medicare and related programs receive $732 billion (21 percent).

Instead of dipping into entitlements, Harvard University economics professor Martin Feldstein suggests in a recent New York Times op-ed that a better alternative may be increasing tax revenue, rather than tax rates, by limiting tax deductions, credits and exclusions.

Higher interest rates

Bond market yields are at a 10-year low, according to Bloomberg. As there is an inverse relationship between bond values and interest rates, numerous experts fear that interest rates will become dramatically higher, a traditional result of a market crisis. The number of investors who believe another market crisis will hit the U.S. rose from 18 to 22 percent between the last two quarterly Bloomberg polls.